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Tuesday, December 28, 2010

Controlling and Costing Materials:Part 1

Effective materials management is essential in order to (1) provide the best service to customers, (2) produce at maximum efficiency, and (3) manage inventories at predetermined levels to stabilize investments in inventories.

Successful materials management requires the development of a highly integrated and coordinated system involving sales forecasting, purchasing, receiving, storage, production, shipping, and actual sales. Both the theory of costing materials and inventories and the practical mechanics of cost calculations and record keeping must be considered.

Costing materials present some important, often complex, and sometime highly controversial questions concerning the costing of materials used in production and -he cost of inventory remaining to be consumed in a future period. In financial accounting, the subject is usually presented as a problem of inventory valuation; in cost accounting, the primary problem is the determination of the cost of various materials consumed in production and a proper charge to cost of goods sold.

Procedures for Materials Procurement and Use:

Although production processes and materials requirements vary, the cycle of procurement and use of materials usually involves the following steps:

Engineering and planning determine the design of the product, the materials specifications, and the requirements at each stage of operations. Engineering and planning not only determine the maximum and minimum quantities to run and the bill of materials for given products and quantities but also cooperate in developing standards where applicable.

The production budget provides the master plan from which details concerning materials requirements are eventually developed.

The purchase requisition informs the purchasing agent concerning the quantity and type of materials needed.

The purchase order contracts for appropriate quantities to be delivered at specified dates to assure uninterrupted operations.

The receiving report certifies quantities received and may report results of inspection and testing for quality.

The materials requisition notifies the storeroom or warehouse to deliver specified time or is the authorization for the storeroom to issue material to departments.

The materials ledger cards record the receipt and the issuance of each class of materials and provide a perpetual inventory record.

Accounting procedures for materials procurement and use involve forms and records necessary for general ledger financial accounting as well as those necessary for costing a job, process or department, and for maintaining perpetual inventories and other statistical summaries. The purchase requisition, purchase order, receiving report, materials requisition, bill of materials, scrap report, returned materials report, materials ledger cards, and summary of materials used are some of the forms used for materials control under a cost system. The purchases journal, the cash payments journal, the general journal, and the general ledger control accounts are also used.

The discussion here is not based on any particular type or size of industry. It is, rather a general description of the accounting and controlling procedure involved in the procurement and use of materials. To understand the detailed procedure of purchasing, receiving stocking, and using materials

First-in-First-Out (FIFO) Costing Method Average Costing Method Last-in-First-Out (LIFO) Costing Method Other Methods-Month end average cost, last purchase price or market price at date of issue, and standard cost.